Are gold prices ready to resume the run higher? It has had an auspicious start to 2011 and the negative reports relative to the metal have been on the rise. The gold bugs are jumping up and down saying buy, buy, buy! And the other side is calling for the price to fall to $1050 per ounce. Who is right in the quest for profits in gold?

The reality is that they both maybe right. We have seen a short term pullback of nearly $100 per ounce for gold and it currently hit a key support level and held.

Gold demand in India has benefited from a combination of the country’s strong economic growth and its high rate of inflation.

Indian investors are raising their allocation to gold. Reports suggest gold medallion and bar sales were strong during 2010 in India, and in particular in the fourth quarter, relative to the same period of the previous year, up 30 per cent annually, to 250 tonnes. Consequently, the Reserve Bank of India has authorised seven more banks to import bullion. The World Gold Council (WGC) expects the impact of this measure to be visible during 2011.

Financial history teaches that market prices are not just subject to cyclical fluctuations — mainly following the business cycle. They are also liable to much longer lasting secular trends, often spanning 15 years, 20 years or longer. These secular cycles are visible in stocks, commodities, bonds and precious metals.

Take gold as an example …

Gold experienced a secular bull market starting in the late 1960s and culminating in a spectacular high in 1980. What followed was a severe secular bear market lasting roughly 20 years. Then, around the turn of the millennium, another secular bull market got going.

I believe gold’s current secular bull market probably has much further to go. And since bull market corrections are buying opportunities you should use them as such.

That might sound easier than it is to do. Buying into nerve wrenching corrections can be a tough pill to swallow. But it’s much easier if you have some strong arguments at hand.

Let me give you 13 of them:

Reason #1A Global Debt Crisis Has Broken Out

No matter where you look — Europe, Japan, or the U.S. — the same dire picture shows up: Mountains of government debt plus larger mountains of unfunded liabilities. Many of the modern welfare state’s promises will be broken sooner or later. The easiest way to kick this can down the road is by printing money.

The second option is outright default …

In that case government bondholders would have to bear the losses. This is a much more honest and evenhanded way of dealing with the inevitable, because those who have willingly taken the risk of lending money to over-indebted governments and have received interest payments as long as the going was good should bear the losses if things turn sour. Unfortunately our political elite seem set on averting this outcome at any cost.

Reason #2The Quest for a Weak Currency
Has Become Respectable

Not too long ago most economists and even everyday people knew that economic development and the creation of wealth went hand-in-hand with a strong and strengthening currency.

This knowledge seems to be lost. A global currency war has started; sabotaging thy neighbor’s policies via currency depreciation is common.

Gold is insurance against this loss of relative wealth on an international scale.

Reason #3Derivatives Are Hanging Like a “Sword of Damocles” over the Financial System

Derivatives have grown exponentially during the past 20 years. They have yet to withstand a real stress test. The panic after hedge fund LTCM went bust in 1998 or the case of AIG may be harbingers of what to expect.

Reason #4U.S. Fed Chairman Bernanke Is a Stated Inflationist

Alan Greenspan, Ben Bernanke’s predecessor as Fed chairman, tried to cultivate an image of being a sound money advocate. Covertly he did the exact opposite!

Not so Mr. Bernanke …

From the beginning of his career as a central banker he has openly declared his clear convictions as an inflationist. For him the printing press is the universal remedy of each and every economic problem as he made clear in his famous November 2002 speech: “Deflation: Making Sure It Doesn’t Happen Here.”

Reason #5The Current Monetary System Has Entered Its Endgame Phase

History shows that monetary systems are mortal. They come and they go. The current system of fiat money backed by government monopolies has been in existence since August 1971. And it’s a huge economic experiment, probably the largest since communists took over Russia in 1917.

The weaknesses of this monetary system, especially the ease of government manipulation, are getting more obvious by the day.

Reason #6Markets May Force the Return to a Sound Monetary System

When confidence in a monetary system is lost, it is very difficult to regain it. A disappointed and deceived population won’t fall for the same political promises that were just broken. They’ll insist on something reliable.

If this were to happen, gold would naturally reemerge as the basis of a new and sound monetary order. This reasoning may actually explain why gold is still in the coffers of most central banks, even the Fed’s.

Reason #7Gold Is Coming Back as an Asset Class

Globally, gold holdings make up only 1 percent of all financial assets. Not too long ago 5 percent to 10 percent was typical for conservative investors. And most institutional investors are totally out of gold. With the above mentioned problems gaining more and more publicity gold may see a revival as an asset class.

Rising gold prices have also sparked interest. And the introduction of ETFs has paved the way for individual investors to easily add gold to their portfolios … even their IRAs.

China, India, Brazil — the largest emerging economies — are booming. And it looks like a durable long-term shift to more growth and wealth has emerged. Consequently, investment and jewelry demand for gold are also growing.

Plus, China has step-by-step allowed its citizens to buy the precious metal.

Reason #9Central Bank Bureaucrats Are Rethinking Their Stance

Global gold supply did not match demand in the recent past. Sales by central banks filled the gap. But now, with rising gold prices, central bank bureaucrats have started to rethink their stance …

Most have actually stopped selling. And those of emerging economies — India, South Africa, China, Russia and Argentina — have started buying relatively huge amounts.

Reason #10Gold Mining Production Is Stagnating at Best

Despite rising prices, gold mining supply has hardly budged during recent years. The easy to exploit mines — the huge deposits — are already in production. In short, it’s getting more and more difficult to find enough new gold.

Reason #11Gold Mining Is Getting More and More Expensive

It’s not only getting harder to find new exploitable deposits, it’s also costing more to get the metal out of the earth. The most important factors of production are becoming more expensive, especially energy, the same for manpower in emerging countries. Environmental costs are also soaring.

Plus miners have to use more expensive technology for extracting gold from difficult locations, since the easy ones, as noted above, are already in production.

Reason #12Gold Is Still Cheap

The global money supply has increased dramatically during the past decade, especially since 2008. And if you use money supply as a reference to value gold, the precious metal is still very cheap.

For example, if M1 were taken as the basis of a new 100 percent gold standard monetary system in the U.S., gold’s price would be anchored at $6,910 per ounce.

The same reasoning for Euroland gets us to €13,628 per ounce using Europe’s M1 money supply.

Relative to other asset classes gold is also cheap. The Dow to gold ratio is currently at 8.3. Historically it has been as low as 1 and even lower.

Reason #13The Current Secular Up Trend Has More Leeway

During secular bull markets prices usually go up by a factor of at least 10 to 15.

Just think, during the last secular bull market the Dow rose from 800 in 1982 to 12,000 in 2000. Same thing for gold during the 1970s: From $35 per ounce to $850. And based on all the reasons I’ve given you today, gold’s current bull market should achieve similar magnitude.

Of course, there will be corrections along the way — even cruel ones. To give you an example: In 1974 gold declined more than 40 percent. But since the drivers of that bull market were still valid, even that slump turned out to be a buying opportunity.

FORT LEE, N.J., Jan. 26, 2011 President Obama’s State of the Union address last night did not make one single mention of inflation, when it is the belief of the National Inflation Association

that massive price inflation (especially food inflation) will become America’s top crisis by the end of this calendar year. Obama’s speech also failed to mention the Federal Reserve, the Federal Funds Rate being held near 0% for over two years, and the Fed’s latest round of$600 billion in quantitative easing. Unless Obama addresses our nation’s fiat currency system, nothing else he says has any meaning at all.

After the U.S. lost 8.36 million jobs over a two year period from December of 2007 through December of 2009, our economy has recovered 1.12 million jobs as a result of the Federal Reserve and U.S. government spending $4.6 trillion on bailouts and stimulus programs. That is over $4 million spent for each job created. Instead of bailing out Wall Street and allowing non-productive bankers to receive record bonuses, the U.S. could have sent a check for $550,000 to each middle-class American who lost their job.

When a central bank prints trillions of dollars out of thin air, you are going to see some type of a nominal uptick in economic statistics. Obama can brag all he wants about over 1 million jobs being created, but he continues to ignore what the ultimate cost of it will be. When a government has an annual cash budget deficit of over $1 trillion that cannot possibly be balanced by raising taxes, massive inflation is the inevitable outcome. Our real budget deficit, once you include increases in our unfunded liabilities for Social Security, Medicare, and Medicaid, is already north of $5 trillion. NIA believes the U.S. is now at serious risk of experiencing hyperinflation by the year 2015.

Obama proposed in his speech that “we freeze annual domestic spending for the next five years” saying it “would reduce the deficit by more than $400 billion over the next decade, and will bring discretionary spending to the lowest share of our economy since Dwight Eisenhower was president.” The truth is, Obama’s proposals, if successfully implemented, would not reduce the deficit by $400 billion over the next decade. They would only cut $400 billion from proposed spending increases. NIA doesn’t understand why Obama would even waste his breath talking about reducing the deficit by $400 billion over the next decade, when the Federal Reserve is creating $600 billion in monetary inflation over a period of just eight months. Americans who listened to Obama speak last night wasted over an hour of their time, because until the Federal Reserve raises interest rates and stops printing money, it will be impossible for the U.S. economy to truly recover and become healthy.

Even if the U.S. government cut all discretionary spending down to zero, we would still have a budget deficit from Social Security, Medicare, and Medicaid alone. Surprisingly, Obama admitted that most of the cuts he proposed “only address annual domestic spending, which represents a little more than 12% of our budget.” When referring to the Deficit Commission’s proposed spending cuts, Obama said “their conclusion is that the only way to tackle our deficit is to cut excessive spending wherever we find it”. In what was Obama’s most shocking statement of the night, he went on to say, “This means further reducing health care costs, including programs like Medicare and Medicaid, which are the single biggest contributor to our long-term deficit.”

This is the closest Obama has ever come to admitting that major cuts to Medicare and Medicaid are necessary, if we want to have any hope of ever balancing our budget. However, NIA is taking Obama’s comments with a grain of salt. He immediately changed the subject in the very next sentence, claiming his health care reform law that was enacted last year “will slow these rising costs”. He then continued to defend the law saying, “repealing the health care law would add a quarter of a trillion dollars to our deficit.”

One week ago, the new Republican-controlled U.S. House of Representatives voted 245-189 to repeal Obama’s health care reform law. The House’s vote to repeal it is meaningless because it would never pass the U.S. Senate and even if it did, Obama would simply veto it. NIA believes the law should be repealed because it is impossible for government legislation to bring down health care costs. Only the free market can bring down health care costs and the health care reform law will impede the free market more than any piece of legislation has ever impeded the free market in any industry or sector in history. In our opinion, the new health care law is guaranteed to add trillions of dollars to the deficit over the next decade and there is absolutely no chance of Obama ever making the necessary dramatic cuts to Medicare and Medicaid until the U.S. is already in the middle of an outbreak of hyperinflation.

When it comes to Social Security, Obama said we need a “bipartisan solution to strengthen” it and “we must do it without putting at risk current retirees” and “without slashing benefits for future generations”. In other words, nobody in Washington is even going to bring up the possibility of cutting or eliminating Social Security, because it would be political suicide for them. We need more honest representatives in Washington like Ron Paul who aren’t afraid to speak the truth about the need to cut entitlement programs and inform the American public to the consequences of our government’s deficit spending.

Most Americans think they don’t have to worry about our country’s national debt because our grandchildren are the ones who will ultimately be responsible to pay it off. Unfortunately, it won’t just be our grandchildren who feel the pain of our deficit spending and monetary inflation. All Americans with incomes and savings in U.S. dollars along with all foreigners holding dollar-denominated assets will begin to feel the pain of our government’s destructive actions in the very near future through massive price inflation and the U.S. dollar losing nearly all of its purchasing power.

One thing from last night’s State of the Union address is very clear, Obama is not serious about cutting spending and nobody inWashington has any expectation of the U.S. ever returning to a balanced budget. NIA believes that this past week’s dip in the prices of gold and silver is an unbelievable buying opportunity for Americans who already own precious metals as well as those wishing to buy precious metals for the first time. Sure, both gold and silver could dip lower in the short-term, but we can’t try to time short-term fluctuations and we need to stay focused on the long-term destruction of the U.S. dollar. In future State of the Union addresses to come in another year or two down the road, the entire focus of the President’s speech will likely be on inflation and the collapsing U.S. dollar. When that time comes and mainstream America becomes aware of what NIA members have known for years, we could easily see $5,000 per ounce gold and $500 per ounce silver, and everybody will regret not loading up as much as possible at these levels.